Fitch Upgrades Kiwibank's VR to 'bbb'; Affirms Other Ratings

(The following statement was released by the rating agency)
SYDNEY, May 06 (Fitch) Fitch Ratings has upgraded Kiwibank
Limited's (Kiwibank)
Viability Rating (VR) to 'bbb' from 'bbb-', and affirmed the
Foreign and Local
Currency Long-Term Issuer Default Ratings (IDRs) at 'AA' and
'AA+' respectively.
The Outlooks are Stable. A full list of rating actions is
provided at the end of
this commentary. Today's rating action has no impact on the
ratings of
Kiwibank's covered bonds.
KEY RATING DRIVERS AND SENSITIVITIES - IDRS, SENIOR DEBT AND
SUPPORT RATINGS
Kiwibank's IDRs, senior debt and support ratings reflect Fitch's
view that it is
a core subsidiary of New Zealand Post (NZ Post), which in turn
is a wholly-owned
state enterprise of the New Zealand sovereign (AA/Stable). The
agency believes
support would likely flow from the sovereign through NZ Post to
Kiwibank should
NZ Post face any difficulties in providing support itself. In
addition, NZ Post
provides an explicit, unlimited guarantee for the bank's senior
unsecured debt
(including customer deposits). Kiwibank accounts for 94% of NZ
Post's assets.
Its debt, the majority of which is made up of retail deposits
held by New
Zealanders, accounts for almost all of NZ Post's debt.
The Stable Outlook reflects the Outlook of the sovereign rating.
Kiwibank's
IDRs, senior debt and Support ratings are sensitive to changes
to New Zealand's
Long-Term Foreign and Local Currency IDRs, or a change in NZ
Post's, and in turn
the sovereign's willingness to provide support to Kiwibank.
KEY RATING DRIVERS - VR
The upgrade of Kiwibank's VR reflects the bank's entering a
phase of less
aggressive growth, associated strengthened underwriting, and
consistent, sound
asset quality, which compares favourably against domestic peers.
The upgrade
also takes into account a more sustainable operating
profitability brought on by
increased diversification in revenue streams. Capitalisation has
continued to
strengthen but remains moderate relative to its peers.
Kiwibank's VR also
reflects its growing retail franchise, and its good funding
position, which
benefits from its indirect government ownership and the
aforementioned
guarantee.
Fitch believes that Kiwibank's asset quality will continue to
hold up well -
notwithstanding previous periods of rapid growth - on the back
of solid
prospects for the New Zealand economy with an improving labour
market and
stricter underwriting criteria. It improved in the first half of
the financial
year ending 30 June 2014 (1H14) due to better economic
conditions and lower risk
appetite. The likelihood of a rise in the policy rate in 2014
and 2015 poses
some risk to asset quality. However, Kiwibank partially
mitigates this risk by
assessing loan serviceability at rates substantially above the
bank's current
mortgage rates. The authorities' 10% limit on new mortgages with
loan-to-value
ratios greater than 80%, introduced in late 2013, should also
help asset
quality.
Over the past three years, the bank's capitalisation improved
significantly
(FYE11: 5.31%) due to growth in retained profits and regular
small capital
injections provided by its parent, NZ Post. Fitch expects it to
continue to
improve albeit at a slower pace than over the last three years.
Kiwibank's Fitch
Core Capital ratio was 8.67% at end-December 2013, which the
agency considers
adequate despite being lower than domestic peers'.
Fierce competition and ongoing technology investments are likely
to place some
pressure on profitability. However, Kiwibank has achieved good
growth in
non-interest income over the last three years, mainly through
the sale of
insurance and wealth management products, providing the bank
with increased
diversification in earnings. Fitch expects the bank will
maintain a healthy
profitability in the short to medium term, although profit
growth is likely to
slow.
Kiwibank's funding and liquidity position has remained sound,
supporting its
current rating level. Customer deposits remain the main funding
source, although
short-term wholesale funding is increasing within the mix. This
makes Kiwibank
more susceptible to investor sentiment. In addition, refinancing
risk from
increasing medium- to longer-term funding is mitigated by strong
liquidity
levels and the binding guarantee by NZ Post.
RATING SENSITIVITIES - VR
A return to more aggressive loan growth and weaker underwriting
standards, a
significant weakening in asset quality, and/or deterioration in
capitalisation
may place downward pressure on Kiwibank's VR. Further positive
VR momentum
appears unlikely in the short to medium term.
The rating actions are as follows:
Kiwibank Limited:
Foreign Currency Long-Term IDR affirmed at 'AA'; Outlook Stable;
Foreign Currency Short-Term IDR affirmed at 'F1+';
Local Currency Long-Term IDR affirmed at 'AA+'; Outlook Stable;
Local Currency Short-Term IDR affirmed at 'F1+';
Viability Rating upgraded to 'bbb' from 'bbb-';
Support Rating affirmed at '1';
Foreign currency senior unsecured rating affirmed at 'AA';
Local currency senior unsecured rating affirmed at 'AA+'; and
Commercial Paper Programme affirmed at 'F1+'.
Contacts:
Primary Analyst
Andrea Jaehne
Director
+61 2 8256 0343
Fitch Australia Pty. Ltd., Level 15, 77 King Street, Sydney NSW
2000
Secondary Analyst
Tim Roche
Senior Director
+61 2 8256 0310
Committee Chairperson
Sabine Bauer
Senior Director
+852 2263 9966
Applicable criteria, "Global Financial Institutions Rating
Criteria", dated 31
January 2014; "Rating FI Subsidiary and Holding Companies",
dated 10 August
2012; and "Assessing and Rating Bank Subordinated and Hybrid
Securities", dated
31 January 2014, are available at www.fitchratings.com.
Media Relations: Iselle Gonzalez, Sydney, Tel: +61 2 8256 0326,
Email:
iselle.gonzalez@fitchratings.com.
Additional information is available on www.fitchratings.com
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
here
Rating FI Subsidiaries and Holding Companies
here
Assessing and Rating Bank Subordinated and Hybrid Securities
Criteria
here
Additional Disclosure
Solicitation Status
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ON THE AGENCY'S
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CRITERIA, AND
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WEBSITE.
Fitch Australia Pty Ltd holds an Australian financial services
licence (AFS
licence no. 337123) which authorises it to provide credit
ratings to wholesale
clients only. Credit ratings information published by Fitch is
not intended to
be used by persons who are retail clients within the meaning of
the Corporations
Act 2001.

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